The income velocity of money-an inverse measure of the demand
for money balances-is the ratio of the money value of income to the
average money stock that the public (excluding banks) holds in a
given period. Why the magnitude of that ratio has changed over time
is the subject of Michael D. Bordo and Lars Jonung's classic study,
originally published as The Long-Run Behavior of the Velocity of
Circulation. Supported by statistical data, econometric estimation
techniques, and meticulous historical analysis, this work
describes, in an international setting, how slow-moving economic,
social, and political forces interact with the decisions households
and firms make about how much money to hold.
Annual time series of velocity for several countries from the
late nineteenth century to the late twentieth century display a
U-shaped pattern. Existing theories can explain each section of the
velocity curve-the falling, flat, and rising parts-but the overall
pattern is not consistent with any one theory. Here the authors put
forth a comprehensive explanation for this behavior over time.
Their theory is largely an extension of the approach of Knut
Wicksell, the Swedish economist who stressed the role of
substitution between monetary assets. This approach, which
emphasizes institutional variables, is incorporated into the
arguments for the traditional long-run money demand (velocity)
function. Four types of empirical evidence strongly support the
authors' theory: econometric studies of the long-run velocity
function for several countries; a cross section study of
approximately eighty countries in the postwar period; a case study
of the Swedish monetization process in the fifty years before World
War I; and an examination of the time series properties of
velocity.
Demand for Money suggests that institutional factors, as opposed
to real income, play a greater role in velocity than previously
thought. And these institutional factors have a major impact on
monetary policy. This is a book that will prove of great value to
economists, monetary strategists, and policymakers.
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